On April 16, the House voted to repeal the estate tax. As Majority Whip Steve Scalise (R-La.) put it last week, “the vast majority of our members in the Republican conference have never had the opportunity to stand up for small businesses who are threatened by the death tax everyday.”
The vote, which broke down largely on partisan lines, is a stark reminder of Republican priorities vis-à-vis the federal deficit. Despite the fact that only the wealthiest American estates are affected by the estate tax, these estates are large enough that its repeal will reduce tax revenues by $269 billion over the next 10 years, according to the Congressional Budget Office (CBO). Therefore, repealing the estate tax amounts to increasing the federal deficit by $269 billion over 10 years, at a time when Republicans are insisting that the federal government is otherwise out of money. So, Republicans are willing to increase the federal deficit by $269 billion in order to give the wealthiest 0.2 percent of Americans a tax break, but can’t find $168 billion to fund the Highway Trust Fund to repair our crumbling infrastructure?
More important, however, is what last Thursday’s vote says about Republicans vis-à-vis tax policy. There is perhaps no better concrete demonstration that Republicans are the party of the wealthy.
The federal estate tax is a tax on property (e.g., cash, real estate, stock, etc.) transferred from deceased persons to their heirs. The estate tax is a unified tax, so that assets transferred as gifts during a person’s lifetime are combined with those transferred at death (bequests) and subject to a single rate schedule. The tax is imposed on the decedent’s estate and the rate structure applies to total bequests.
The estate tax, however, is subject to numerous exemptions. Transfers between spouses, for example, are exempt from the tax altogether. The most important (and largest) exemption, though, concerns the portion of an estate’s value that is subject to the tax. The estate tax is only levied on the portion of an estate’s value that exceeds a specified exemption level – $5.43 million per person (effectively $10.86 million per married couple) in 2015. As such, the tax is only directed to the wealthiest estates.
Republicans often insist, as Rep. Scalise did above, that their efforts to repeal the estate tax are motivated by a deep concern for the fate of family farms and small businesses. These arguments are nonsense; they are propaganda driven by ideologues. Here’s why.
First, only two of every 1,000 estates face the estate tax. This is the single most important fact to understand about this tax. Today, 99.8 percent of estates owe no estate tax at all. In other words, only the estates of the wealthiest 0.2 percent of Americans owe any estate tax. According to the Joint Committee on Taxation, “In 2013, the most recent year for which final numbers are available, there were 2.6 million deaths in the United States, and 4,700 estate tax returns reporting some tax liability were filed. Thus, taxable estate tax returns represented approximately one-fifth of one percent of deaths in 2013.” As such, the estate tax is best characterized as a tax on very large inheritances by a small group of wealthy heirs.
Second, taxable estates generally pay less than one-sixth of their value in tax. Proponents of repealing the estate tax often argue that the tax consumes nearly half of an estate’s value. However, among the few estates that owed any estate tax in 2013, the effective tax rate – that is, the share of the estate’s value paid in taxes – was 16.6 percent, on average. That is far below the top statutory rate of 40 percent.
Third, large loopholes enable many estates to avoid estate taxes. Some estates, for example, use grantor retained annuity trusts (GRATs) to pass along assets tax-free. Under a GRAT, the estate owner deposits money into a trust designed to repay the estate the initial amount plus interest at a rate set by the Treasury, typically over two years. If the investment (e.g. a stock) rises in value any more than the Treasury rate, the gain goes to an heir tax-free. If the investment doesn’t rise in value, the full amount still goes back to the estate. These strategies permit the wealthiest estates to avoid taxes. They don’t benefit the broader economy. According to Richard Covey, the “lawyer who pioneered the maneuver,” this loophole may have cost the U.S. Treasury $100 billion in tax revenue since 2000.
Fourth, the family farms Republicans are always talking about, the ones that are constantly being sold off to pay the estate taxes, are a myth. According to the Tax Policy Center (TPC), only roughly 20 (that’s twenty) small business and small farm estates nationwide owed any estate tax in 2013. Furthermore, TPC estimates those roughly 20 estates owed just 4.9 percent of their value in tax, on average.
Fifth, a large share of the biggest estates consists of “unrealized” capital gains that have never been taxed. Under the federal tax code, capital gains tax is due on the appreciation of assets (e.g. a stock) only when the owner “realizes” the gain (typically by selling the asset). Thus, the increase in the value of an asset is never subject to income tax if the owner holds on to the asset until death. In many ways, then, the estate tax serves as a backstop to the income tax, taxing the income of wealthy taxpayers that would otherwise go untaxed.
Sixth, it is not clear that eliminating the estate tax would encourage people to save and thereby make more capital available for investment. In 2003, the Congressional Research Service (CRS) reviewed the empirical research and found that the estate tax’s net impact on private saving is unclear. In contrast, the CRS reported that the estate taxes overall impact on national saving is likely positive. “[I]f the only objective [of eliminating the estate tax] were increased savings,” the report concluded, “it would probably be more effective to simply keep the estate and gift tax and use the proceeds to reduce the national debt.”
As President Theodore Roosevelt stated in 1906, “the man of great wealth owes a particular obligation to the State because he derives special advantages from the mere existence of government.” The estate tax is an important part of this obligation. It exists in large part to avoid an unhealthy concentration of wealth in the hands of a few. We are headed in that direction as it is; eliminating the estate tax would hasten the process.
As the estate tax is a tax on only very few – and by definition the wealthiest – American estates, it is somewhat bewildering how wildly unpopular it is. Polls show that a substantial majority of Americans favor repeal or reduction of the estate tax. Here’s one that says 68% favor total repeal. Here’s another from 2010 in which preventing an increase in the estate tax ranked as the public’s highest concern for the lame duck congressional session. Republicans, then, have public opinion on their side.
“But,” as Paul Waldman wrote in The Washington Post, “this isn’t a problem because votes will be angry at Republicans for trying to repeal the tax, it’s a problem because it demonstrates what Republican priorities are, in exactly the way they don’t want. You can bet that Hillary Clinton will contrast her economic plans with those of Republicans, who want to cut upper-income rates, as well as taxes on investments and inheritances. This is a concrete demonstration of what she’ll talk about.”
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